<p>How does one determine the curve shape for MC? Sometimes it dives down a little bit, then shoots up. However, other times I notice it’s just a straight line. Does it depend what we are talking about or what? Thanks.</p>
<p>The reason behind this is the Law of Diminishing Marginal Returns, which says that “as successive units of a variable input are added to a fixed input, beyond some point the marginal product declines.” What this means is that at first, since you are adding usually units of labor (workers), the marginal product will increase, resulting in a decrease in marginal cost. However, after a certain point, the addition of more units of labor actually lowers the capital, making MC>MP. Therefore, this law is responsible for MC falling initially but then rising later (it kind of looks like a check mark here). The opposite can be said for MP. At first, MP will rise, but then it will fall after a certain point.</p>
<p>When dealing with the different firm types (perfect competition, monopoly, monopolistic competition, oligopoly), the way to tell the MC curve is if the graph is analyzing the short-run or long-run profit maximization. Short-run will look a check mark because price, cost, revenue, etc. can all be changed. Long-run will look like a straight line because (1) it is a summation of the entire MC curve (supply curve) or (2) the cost will be established for the most part.</p>
<p>And don’t forget that profit maximization is achieved when MR=MC.</p>